Power bills: just putting the wind up them

Tom Arup

The federal government has launched a review of Australia’s renewable energy target. The Prime Minister said last week the scheme is causing electricity costs to soar. What impact is the target really having? Tom Arup takes a look.

Is Tony Abbott right? Is the renewable energy target ‘‘very significantly driving up power prices’’?

In short, not really. Undeniably, Australian power bills are higher as a result of the target, but the impact to date has been modest compared to other factors. Various energy regulators put the cost of the target at about 5 per cent of an average household bill. Preliminary modelling commissioned for the Abbott government’s review of the target – carried out by consultants ACIL Allen – finds a typical household's bill is forecast to rise an average $54 a year to 2020 because of the scheme. These are not insignificant sums for many homes. But they are meagre compared to the predominant cause of rising bills – building and maintaining electricity poles and wires. The cost of this network infrastructure is responsible for about 50 per cent of a bill. And many credible observers say market rules have encouraged these costs to be severely inflated to the benefit of network companies and at the expense of consumers. The Prime Minister has been less vocal about this issue.

OK, so it might be modest, but households will save money if the renewable energy target is scrapped?

Not so fast. There is now also a swath of modelling forecasting that, while the target is increasing bills in the short-term, it will in fact lead to lower retail prices by the end of the decade and beyond. The same ACIL Allen modelling commissioned by the government’s target review found a typical household power bill will be an average $56 lower a year between 2021 and 2030 if the target is left untouched. In 2030 the saving is forecast to be as high as $91. Other modelling from Bloomberg and the Clean Energy Council have come to similar conclusions.

Now I'm confused. How can my power bills be higher, then lower under the same program?

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We need to understand how the target works. Firstly it ensures at least 20 per cent of Australia’s electricity is generated by renewable energy sources by 2020. It does so by mandating 41,000 gigawatt-hours of electricity is produced by large-scale renewable energy projects – such as wind and solar farms – and a more modest, uncapped amount comes from small-scale sources such as rooftop solar. Under the scheme, a renewable energy project is given a certificate for each megawatt-hour of power it creates. Energy retailers and some big power users are then made to buy these credits (or create their own by building renewable energy projects) and hand them into the government each year. The number of credits these companies surrender grows each year until the 2020 target is met.

But how does all this influence my power bill?

Electricity has both a wholesale and retail market. Retailers buy power from generators on the wholesale market and then sell it on to households and businesses. But the renewable energy target is forcing more electricity generation be built. At the same time demand for electricity in Australia is falling. So with more generators bidding to sell more power, but buyers wanting less, wholesale prices are being suppressed. On top of that, many renewable energy operators are selling their power into the wholesale market at lower prices than coal and gas-fired power plants. A discussion paper by the energy economics and management group at the University of Queensland last week found wind energy ensured wholesale power prices were $3.2 billion lower over the last six years.

If this is true why am I not seeing any benefit from the lower wholesale price in my bills?

Because the retailers still have to buy renewable energy credits to meet their obligations under the scheme. And they are passing that cost onto customers. What the modelling is forecasting is that by the end of the decade the target’s suppression of wholesale prices will be so great that the savings will overtake the cost of buying credits, meaning retailers will begin to pass on the lower prices to customers.

If this is all working so well why are we reviewing the target? And why does the Prime Minister keep hinting he wants to cut it back?

The loudest complaints against the scheme are coming from the owners of coal and gas-fired power plants. With wholesale prices flagging and more electricity generation being built they are making less money. Some plants are being mothballed, other are running at less capacity. This is being exacerbated by the falling demand for power, which will mean the 41,000 gigawatt-hour target for large-scale renewable energy will actually result in 27 per cent share for clean power by 2020, rather than the planned 20 per cent. Some existing generators say if this situation continues the reliability of power supply will be threatened.

What would fossil-fuel power plants owners have us do then?

In response many of the big power companies are advocating a ‘‘real’’ 20 per cent target. That would see the target cut back to about 26,000 gigawatt-hours, reflecting the lower demand for power. Under this proposal, the ACIL Allen modelling finds power bills would still fall from 2021, but by $24 a year rather than the $56 forecast for an unchanged scheme. And it would also mean renewable energy projects worth billions of dollars would not be built.

We are talking a lot about power prices. But was lowering bills really the ultimate reason for having a renewable energy target?

As unfashionable as it might sound now, the target was put in place and later expanded to encourage more clean energy and to reduce greenhouse gas emissions. The Climate Change Authority earlier this year found the target is forecast to cut emissions by 102 million tonnes between 2012 and 2020. That is a significant chunk of Australia’s pledge to lower national emissions by 5 per cent from 2000 levels by 2020. While scrapping the target, or cutting it back, might give households modest, short-term relief on power bills and help out struggling fossil-fuel generators, it would also leave the government having to find emissions savings elsewhere. With the carbon tax to be scrapped and the replacement direct action scheme struggling to find the numbers to pass Parliament this will be no easy task.